Journal of Human Resource Costing & Accounting

Emerald Article: Corporate culture, business models, competitive

advantage, strategic assets and the bottom line: Theoretical and
measurement issues
Eric G. Flamholtz, Yvonne Randle

Corporate culture, business

models, competitive advantage,
strategic assets and the
bottom line
Theoretical and measurement issues
Eric G. Flamholtz and Yvonne Randle
Anderson School of Management, UCLA, Los Angeles, California, USA
Abstract
Purpose This paper seeks to enhance understanding of the role and effect of corporate culture as a
unique strategic asset on the success of business models.
Design/methodology/approach The paper is a conceptual exploration of several key constructs
and their interrelationship. The argument is based on four related notions: that corporate culture is an
asset; that it is a strategic asset in the sense of comprising a source of competitive advantage; that
it might well be the ultimate strategic asset; and that culture as a strategic asset can be the essence or
core of a business model. The paper also uses empirical examples of actual companies to study and
demonstrate the core constructs and ideas. It also examines issues involving the key dimensions
of corporate culture, the measurement of corporate culture, and certain related performance
measurement issues.
Findings The paper shows that corporate culture is a strategic asset, which, if managed properly,
can be the key differentiating factor in a successful business model. It also shows that when not
managed properly, can actually transform into a liability.
Practical implications This paper demonstrates that corporate culture is a critical strategic asset
because of its role in creating competitive advantage and successful business models. It suggests that
corporate culture can also be the single most important source of competitive advantage in business
models. Finally, it suggests that practicing leaders as well as investors and academics need to pay
attention to corporate culture as a component of business strategy.
Originality/value This paper contributes to the literature and to practice by examining the notion
that corporate culture is a strategic asset in depth and examining the relationship between culture as a
strategic asset and business models. It also takes steps towards a coherent framework for both
scholars and practicing managers to frame and understand the issues involved in the management and
measurement of this critical strategic asset.
Keywords Corporate culture, Assets, Strategic asset, Ultimate strategic asset, Business models,
Performance measurement, Organizational culture
Paper type Research paper

1. Introduction
Few managers or management scholars would question the critical role of corporate
culture in organizational performance (Kotter and Heskitt, 1992; Deal and Kennedy,
1982; Schein, 1992; Flamholtz, 2001; Sackmann, 2006). Culture is well understood to
impact human resources, and comprises a key aspect of human resource management.
However, what is less recognized is that corporate culture is a true strategic asset, and
it might well be the ultimate strategic asset for many, if not all, companies in todays
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1401-338X.htm

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Journal of Human Resource Costing &

Accounting
Vol. 16 No. 2, 2012
pp. 76-94
q Emerald Group Publishing Limited
1401-338X
DOI 10.1108/14013381211284227

economy, especially in the advanced nations. As a result, then, culture is or, at the very
least, can be a critical component of a successful business model just as other forms of
intellectual capital (Ratnatunga et al., 2004). As Dumay and Cuganesan (2011) state,
identifying and measuring intellectual capital is important to contemporary
organizations because intangibles create value and true competitive advantage.
There are four critical interrelated notions here:
(1) that corporate culture (culture) is an asset;
(2) that it is a strategic asset in the sense of comprising a source of competitive
advantage;
(3) that it might well be the ultimate strategic asset; and
(4) that culture, as a strategic asset, can be the essence or core of a business model
(Barney, 1986; Flamholtz and Randle, 2011).
We will examine each of these notions and their interrelationship in turn. First
however, we will define the concept of corporate culture.
2. The concept of corporate culture
The concept of corporate culture has become embedded in management vocabulary
and thought. In order to manage it, we must first understand what culture is and what
it is not.
Although there are many different definitions of the concept, the central notion is
that culture relates to core organizational values. In turn, values are things which are
important to organizations and underpin decisions and behavior. All organizations
have cultures or sets of values which influence the way people behave in a variety of
areas, such as treatment of customers, standards of performance, innovation, etc.
To us, corporate culture consists of values, beliefs, and normswhich influence the
thoughts and actions (behavior) of people in organizations. Values, beliefs, and norms, are
then, the key components or elements that define a corporate culture. Values are the things
an organization considers most important with respect to its operations, its employees,
and its customers. These are the things an organization holds most dear the things for
which it strives and the things it wants to protect at all costs. Beliefs are assumptions
individuals hold about themselves, their customers, and their organization. Norms are
unwritten rules of behavior that address such issues as howemployees dress and interact.
Norms help operationalize actions which are consistent with values and beliefs.
These three elements of culture are actually part of an overall mosaic of culture in
an organization. They are not necessarily all visible either single or in combination.
There are actually several levels or layers of culture in an organization. There is the
surface layer which is what we see and observe, mostly in the norms of behavior on a
day to day basis. Then there are the core values and related beliefs or assumptions
which drive or underlie the behavioral norms. However, below that is what might be
termed a set of cultural attributes, which are the DNA of culture. These cultural
attributes are dimensions of corporate personality. These are things such as attitudes
towards risk, or ethics; propensity towards planning (or not!), systems, processes;
attitudes towards professionalism, or entrepreneurialism, or even bureaucracy. These
underlying cultural attributes drive the core beliefs, values, and norms which
constitute the most observable level of culture.

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3. Culture as an asset and/or liability
The classic notion of an asset is that it is something of value owned or controlled by a
business enterprise. Assets can be tangible like plant and equipment or intangible like
brands, intellectual property, or customer loyalty, the latter being a form of goodwill.

Like goodwill, corporate culture is an intangible but very real economic asset of
business enterprises. For the companies which possess a strong positive culture like
Starbucks, Southwest Airlines, Wal-Mart or Google, it is a true asset, if not in the
strict accounting sense, then in the real economic sense, meaning that it leads to
measurable differential profitability.
It should also be noted that a case can be made that corporate culture is actually an
asset in the accounting sense as well. Specifically, Flamholtz (2005) has proposed that
corporate culture is an asset in the accounting sense. The classic measurement of the
value of an economic asset or resource is the discounted value of expected future
earnings. Flamholtz (2001, 2005) has shown that corporate culture can impact earnings
and thereby meets this criterion.
Thus, we view corporate culture as one of the three components of overall human
capital. The primary dimension of human capital (and the one generally equated with
the notion of human capital are the skills or competencies of individuals. In addition
to this primary dimension of the individual as a form of human capital, a traditioned
group (in the true sociological sense) also comprises an asset and another form of
human capital (Flamholtz, 1995, 1999). The development of a true team in the
sociological sense takes time, effort, and money. Flamholtz (2011) has shown that such
a team or group of people can be a positive contributor to organizational effectiveness.
The third form of human capital is corporate culture. Culture is an intangible asset,
a form of intellectual property. If a positive culture exists, it functions as an
intangible asset. If a negative culture exists, it functions as a drag on performance,
and can quite possible lead to an organizations demise.
Thus, when a company like Starbucks or Wal-Mart has a positive corporate culture
it can, as we shall see, generate positive differential earnings, which is per se an asset.
On the contrary, for other companies with dysfunctional cultures like AIG, K-Mart,
and (for the past 50 years or so) General Motors, their corporate cultures are true
economic liabilities, if not in the accounting sense, then in the colloquial sense of that
term. In companies with dysfunctional cultures, earnings are less than what they
might otherwise be, thereby incurring real opportunity costs.
This dual role of culture as an asset or liability is shown clearly in
the examples of two companies: Starbucks and AIG. The former is a classic success
story with a strong positive culture that is an economic asset, while the latter is
a classic case of a dysfunctional corporate culture that led it to a precipitous
decline in economic fortune and was only prevented from bankruptcy by being too big
to fail.
3.1 Culture as an asset: the example of Starbucks
For many people, Starbucks Coffee Company is an enigma. How does a company with
a commodity product that has existed for centuries if not millennia rise from nothing to
become a firm with more than $10 billion in revenues?
When asked to explain the success of Starbucks, one of the great entrepreneurial
success stories of the last 20 years, Schultz (1994), founder and CEO, has stated that:

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When people ask me about the reasons for Starbucks success, I tell them not what they expect
to hear. I tell them that it was the people at Starbucks and the way we managed them that was
the true differentiating factor.

Similarly, Behar (2008), former Executive VP of Operations for Starbucks and

President of Starbucks International, has stated very clearly in his book about
Starbucks that the companys success is about leadership and culture rather than its
product; as the title of the book states: Its not about the coffee!
The key point is that the real differentiating factor in Starbucks success is not its
coffee per se; the coffee comes from beans which are a commodity. Starbucks does not
have a proprietary coffee bean, or a proprietary roasting process, which magically

produces a superior coffee bean and beverage; rather, what is does have is a distinctive
and superior culture that influences the behavior of people and comprises an intangible
but real economic asset. Starbucks has become a global brand, and the leader in its
space, with more than $10 billion in revenues in 2011. This has been accomplished by
managing its corporate culture, an intangible but real economic asset.
3.2 The liability and cost of a dysfunctional culture: the example of AIG
If Starbucks is the apotheosis demonstrating how a positive culture can be an asset,
then AIG is one of many examples of how culture can become dysfunctional and lead
to severe economic distress if not actual collapse. Once recognized as a leading
company, AIG was at the center of the financial crisis that affected not only the USA
but also the entire financial system. AIG is almost 100 years old (it was founded in
1919), is listed on the New York Stock Exchange (NYSE), and was led for decades by
Maurice Hank Greenberg, a respected business leader (Flamholtz and Randle, 2011).
The precipitous decline of AIG is directly attributable to a toxic corporate culture,
which failed to permit people to challenge complex financial transactions. As Dennis
and OHarrow (2009) have observed, the rapid decline of AIG was attributable to
overexposure to the now infamous Credit Default Swap, one of the financial products
referred to by Warren Buffet as a financial weapon of mass destruction! Using
econometric models based upon years of historical data about the variation in
corporate debt, AIG concluded that there was a 99.85 percent chance of never having to
pay out any insurance on credit default swaps. Assuming that total economic collapse
would not occur, it seemed that AIG could earn millions of dollars with virtually no
risk, a classic economic free lunch, (which of course is not supposed to exist in the
real world and, in fact, was actually a statistical mirage)!
In fact, it was not just a failure of statistical analysis at AIG that led to its near ruin; it
was the failure to adhere to a core cultural norm that led virtually to disaster. Under
leadership of Greenburg, the normwhich had been embedded in the culturewas that just
about anyone could question a trade.This led to a strong-functional culture that helped to
avoid undue risks. However, according to people who worked for the firm, under Frank
Cassano, the then leader of AIGs Financial Products Group, the norm that anyone could
question a trade would change and be abrogated, leading to a dangerous culture which
embraced great risks without adequate understanding of the potential consequences
(Dennis and OHarrow, 2009). There were doubters atAIG, who questioned the wisdomof
credit default swaps and the magnitude of the companys commitments to those esoteric
financial products; but they remained silent, cowed by Cassano and his enthusiasmfor this
spurious notion of an apparently free lunch! The net result was that credit default swaps

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became a toxic product for AIG, the poisoned fruit of a culture that had transformed from
one of open discussion into a dysfunctional culture that avoided challenging the
powerful leader Cassano and his pet ideas and products.
Virtually all that prevented AIG from total economic collapse as a company was
that it was deemed to be to big (to be allowed) to fail. AIGs products were so
embedded in the financial system that it was deemed to be too great a risk to allow the
company to fail.
4. Strategic assets
Not all assets are strategic assets. For example, a computer might be an asset, but it
is not typically a strategic asset, because it is essentially a commodity product that can
be purchased by other firms.
A strategic asset is an asset that provides a source of sustainable competitive
advantage. We propose two criteria for something to be a strategic asset:
(1) it must provide a competitive difference; and
(2) it must be sustainable for at least a period to exceed two years.
The first criterion is that to be a strategic asset the asset must provide some differential

benefit to a firm. A brand, though intangible, can be a strategic asset. It is well

established that a brand is an asset, and that a brand can have great economic value.
What makes a brand a strategic asset is that it can be a source of preference for present
and potential customers. For example, when someone says, as the authors actually
overheard, lets go to Starbucks rather than saying lets go for a coffee or
Cappuccino; that demonstrates the power and differential benefit of a brand.
Similarly, when someone ask for a Coca Cola rather than a carbonated soft drink or
a Pepsi that too demonstrates the benefit of a brand.
A strategic asset must also be sustainable. Our operational definition of
sustainability is that something must be able to last for a minimum of two years for
it to be deemed a strategic asset; this is analogous to the criterion for a fixed asset in
accounting. As a result the so-called first mover advantage (which is a real
advantage) is not necessarily a source of sustained competitive advantage. It can be
countered by late movers which improve upon a product and render the first mover
advantage meaningless. For example, Apple has severely wounded Rims Blackberry,
if not rendered it virtually obsolete, or at least it, by its own innovation of the I-phone.
Another aspect of sustainability is the difficult of imitating the strategic asset. The
more difficult something is to copy, the greater the degree of sustainability.
Similar to the above discussion, Barney (1986, 1991, 2002) has noted that the
resource based view of strategy suggests that something will provide a sustained
competitive advantage when it meets three criteria:
(1) it is important to the company because it has a positive effect on profits;
(2) it is difficult to imitate; and
(3) it is scarce.
4.1 The nature of culture as a strategic asset
Our proposition is that culture is a strategic asset. Culture functions as a strategic asset
in several ways.

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One key is the impact culture has upon the ability to attract, motivate and retain
people, which comprise the human capital of an enterprise. Some firms are known for
being attractive places to work, that is having positive cultures. In fact, some
companies compete to be recognized as one of the so-called best places to work.
This, in turn, enables a company to attract the best and the brightest talent. The
authors have seen this in action at many companies. For example, when Starbucks
(already known in its early years as having a good culture) was seeking to hire a
senior human resources executive and placed, an advertisement in the Wall Street
Journal, there were more than 600 applicants, including three from the same firm!
Culture not only serves to attract people, if often can serve to retain them as well.
In the case of a home builder which was recognized by employees for a very favorable
culture, the company was actually able to offer less compensation than competitors
without losing people. Since it is costly to recruit and train people, this ability to retain
human capital is a strategic asset as well (Flamholtz, 1999).
For these reasons, companies are increasingly recognizing that an employee
brand (the branding of its culture) is a strategic asset or competitive weapon just as
important as or even more important than other factors.
5. Culture as a strategic asset: the case of Wal-Mart and K-Mart
We believe that culture is a true strategic asset. It is a true source of competitive
advantage, and results in differential corporate performance which can be measured in
financial results. This can be demonstrated in the example of the success of Wal-Mart
versus K-mart below.
On the surface, there are no major differences between Wal-Mart and its major
competitor K-Mart. Both companies market to the same customers, and there are no
products that Wal-Mart has that K-Mart does not have. As a walk through these stores

will demonstrate to the observer, they both sell exactly the same things: Johnsons Baby
Powder, Allergan lens solution, Colgate Toothpaste, and other consumer disposables
and staples. They both have the same kinds of stores and they operate in similar
geographic locations. They recruit from the same pool of people. Yet in spite of these
similarities, Wal-Mart has produced a vastly different financial result for investors than
K-Mart. It is true that today Wal-Mart has a significantly greater scale than K-Mart;
however, when Wal-Mart was founded the reverse was true, and yet Wal-Mart
has come to dominate K-Mart even though the later had the original first mover
advantage.
In addition, the financial return to investors measured in terms of stock prices
differs greatly between the two firms (Flamholtz and Randle, 2011). In the decade of the
1990s, the stock price of K-Mart almost doubled. An original investment of $10,000
would have been worth almost $20,000 by 1999. This was a reasonable return,
but possibly less than what might be expected for this type of company. During
the same period, the stock price of Wal-Mart increased several fold. Specifically,
an investor who made an original investment of $10,000 in 1990 would have seen the
value of that investment increase to approximately $280,000! This is an astounding
difference, especially when these companies are not like Microsoft or Amgen, where
there are proprietary products or proprietary intellectual property. If we carry our
analysis a little further to the end of 2003, then the results are even more dramatic.
By the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his

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or her investment. While Wal-Marts stock price did decline as a result of the market
collapse from 1999 to 2003, the original investment of $10,000 would still have been
worth just under $200,000.
Wal-Mart and K-Mart are selling essentially the same commodities, but with vastly
different financial performance results. What explains that? Soderquist (2005), the
former Vice Chairman and Chief Operating Officer of Wal-Mart, now retired, attributes
the companys success to its culture. We believe that Soderquist is correct, and that
much of the explanation of the differential financial value between these two
companies is attributable to cultural differences between the two companies.
This is not to suggest that Wal-Mart is a perfect or even a model company. There
have been numerous criticisms and lawsuits against Wal-Mart. Nevertheless, from an
economic standpoint of organizational success; Wal-Mart is clearly a superior
organization, clearly the economic victor versus K-Mart, and clearly the dominant
player in its market space.
It is in this sense that its culture is a true strategic asset for Wal-Mart. Corporate
culture is the key competitive difference between the two companies, and is to a very
great extent the reason for the difference in success of these two otherwise virtually
identical companies.
This example also shows that culture also meets the criteria Barney (1991) has
articulated for a sustained competitive advantage:
. it is important to the company because it has a positive effect on profits;
. it is difficult to imitate; and
. it is scarce.
The Wal-Mart culture haws a positive effect on profitability vis a vis its competitor
K-Mart. It is difficult, possibly impossible, to imitate. It is also scarce in the sense of
being relatively rare as a phenomenon. It also is has scarcity value because culture is
difficult and costly to create and manage, especially in larger organizations. We will
address this last issue below.
6. The ultimate strategic asset
Unfortunately, most assets, even strategic assets, are ultimately perishable. The reason
for this is that it they can be copied, or in the case of intellectual property they can be

worked around. For example, even a patented molecule in biotech can be defeated
by another pharmaceutical firm with slightly differentiated products.
Most of the things over which organizations compete can be copied or neutralized by
competition. Products can be imitated or improved upon. Financial resources are fungible.
Many companies have capable people, which neutralize this as a competitive advantages.
The ultimate strategic asset would need to be something that is not only
not-perishable; but it must also be something that cannot be imitated easily if at all by
competition. Ideally it would be something that is invisible to competition so that they
cannot visualize what it is and therefore increase the difficulty of copying it.
7. The rationale for culture as the ultimate strategic asset
Barney (1991) has proposed, and we agree, that a companys culture can be a stronger
source of sustained competitive advantage than products or services, because unlike

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the latter it cannot be imitated. In our view, however, culture is not just a strong source
of sustainable advantage; it is the ultimate source of sustainable advantage, and, in
turn, the ultimate strategic asset. Building upon the discussion above, here is our
argument in brief:
We have explained that organizational cultures, which are inimitable, are a source
of sustainable competitive advantage for firms (Barney, 1986). A companys culture
if well managed is transmitted to generations of employees through the companys
DNA, thus perpetuating this source of competitive advantage. This makes it a
sustainable strategic advantage.
Corporate culture represents the one thing that a firm has that is ultimately not
susceptible to imitation or duplication by another company. Although it is possible to
clone sheep, it is not simple to do. Similarly, it is not simple, and (we believe) virtually
impossible to clone a firms culture. Even when a company tries to copy a culture, it is
not possible to duplicate it exactly. The unique circumstances of every companys
situation and history make cloning another culture a virtually impossibility. Difference
in leadership personalities, size, historical experiences, and a variety of other factors all
combine to make a corporate culture unique. Attempts to copy of clone it will lead to
artificial cultures which do not fit. For example, in one instance with which we are
familiar, a competitor to PowerBar (now owned by Nestle) perceived that culture was
an asset for PowerBar. Not truly understanding what was being done to create and
manage PowerBars special culture, the competitor misconstrued what it was and
spent more than $1 million trying to copy PowerBars physical facilities for employees
rather than the invisible culture management process that PowerBar had created with
our assistance (Flamholtz and Randle, 2011).
Corporate culture is, then, not just a source of competitive advantage; it actually
seems to be the ultimate source of true sustainable competitive advantage. This is
because of the extreme difficulties, if not impossibility, of replicating culture across
organizations. In addition, it is a relatively an invisible strategic asset. The fact that
culture is difficult is difficult to see relatively makes it function as a stealth
competitive weapon.
The bottom line is that corporate culture can thus be viewed as the ultimate
strategic asset because of its unique attributes.
8. Culture as a strategic component of business models
In order to explain the role that culture can play in a business model, we must first define
what we mean by the term business model itself. During the past several years, the
concept of a business model has received a great deal of both academic and practitioner
attention (Zott et al., 2011). The concept of a business model is widely used in business
and academic literature; however, as Zott et al. (2011) point out in their comprehensive
review and critique of the business model literature, it appears that there has yet to
develop a generally accepted definition of that term and related language that can be

used to communicate about and analyze business models systematically. As they state:
[. . .] scholars do not agree on what a business model is. This means that one persons
business model might not fit with another person conception of what a business model
is. As we shall explain below, this has direct relevance to our notion that corporate
culture can be the essential ingredient in a business model.

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Although there is no generally accepted agreement about the meaning of the
construct of a business model, there do appear to be certain common elements in many
versions of this construct. The three common elements (either explicit or implicit) are:
(1) target (customer) markets;
(2) a mechanism of delivering a product or service via the use of resources and
organizational processes (termed a business architecture); and
(3) value derived for the enterprise and its stakeholders (Zott et al., 2011; Teece,
2010; Johnson et al., 2008; Timmers, 1998).
Consistent with these core elements, as used here, a business model refers to the
entirety of the processes from the selection of a market to the delivery of a product or
service by means of a specified (constructed) business architecture.
A business model can of itself be a source of competitive advantage, as seen in the
many examples of disruptive competition by internet (web) based companies like
Amazon.com. For example, the emergence of Amazon.com has literally driven
borders (retail book stores), with its classic brick and mortar business model, into
bankruptcy.
In addition to competition with business models per se, organizations compete on
many levels with many different strategic assets. They compete not only in terms of
products and services, but also with brands and other strategic factors of production
(such as human capital and intellectual property) as well.
One of the key components of a business architecture or organizational
infrastructure is corporate culture. It is increasingly recognized the culture is a key
strategic asset and a basis of competition among firms (Barney, 1986, 1991, 2002;
Flamholtz and Randle, 2011).
The special features of corporate culture which combine to make it the ultimate
strategic asset, in turn, lead to it becoming a powerful basis for a business model.
There are three specific attributes of culture that make it a candidate for competitive
differentiation in a business model:
(1) corporate culture is difficult and costly to develop;
(2) once developed it can be maintained and is not inherently perishable; and
(3) to a very great extent, it is not readily visible to the casual observer, making it
difficult to copy.
This has led some companies such as Starbucks, Southwest Airlines, Google and
Wal-Mart, among others, to view culture as a core component (if not the core component)
of their overall business model and strategy. In effect, their business models are built
around culture as the core strategic asset. We will return briefly to the example
of Starbucks and provide some additional material. We will also examine how
Southwest Airlines, a very different business, utilizes corporate culture in its business
model.
8.1 Culture in the business model of Starbucks
As we have alluded to above, corporate culture is at the core of Starbucks business
model. The companys product is nominally coffee and coffee beverages; but the real
product as articulated by Schultz and Jones Yang (1997) is the experience of the

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8

so-called third place. The basic syllogism underlying Starbucks culture is: the way
we treat our people affects the way they treat our customers, and in turn, our financial
performance.
Stated differently, Starbucks realizes that the key source of its competitive difference
is the way it treats its people, a key part of its culture. This in turn is influences the way
that its people take care of customers (another cultural dimension). Thus, Starbucks is
not competing on coffee, as Behar (2008) has noted; Starbucks is competing on the basis
of culture. Its business model is built around its culture!
8.2 Culture in the business model of southwest airlines
Like Starbucks, Southwest Airlines (or other airlines like Lufthansa, British Airways,
Singapore Airlines or United Air Lines) provide what is essentially a commodity
product air travel. They use equipment fromone of twomajor aircraft manufacturers:
Boeing and Airbus. Since the aircraft for the same routes are virtually identical, airlines
devote a great deal of effort to creating a perceived difference in their airlines service and
their brand. This is where corporate culture can (and typically does) play a critical role.
They way that airline personnel treat their customers is a critical manifestation of
its culture. Southwest Airlines, a major US domestic carrier, emphasizes customer
service not only in its advertising but also to its employees as a key competitive
differentiator.
Starbucks, Southwest Airlines, Google and Wal-Mart, among others, have built
their business models are built around culture as the core strategic asset. It has also led
them to superior financial performance in their respective spaces, which is the ultimate
measure of the value of an asset.
This has important implications for both theory and practice, which we will
examine in a subsequent section.
9. The cost and value of corporate culture as a strategic asset
As noted above, Barney (1986) has stated that the resource based view of strategy
suggests that one criterion of a sustained competitive advantage is that the things
under consideration s must have a positive effect on profits. Culture has been shown to
have a direct statistically significant impact on the bottom line of corporate financial
performance (Kotter and Heskitt, 1992; Flamholtz, 2001).
Kotter and Heskitt (1992) provided some of the first empirical evidence of a
statistically significant relationship between culture and financial performance. Their
intent was to test the prevailing assumption of a link between strong cultures and
superior financial performance. In their cross sectional research study, they selected
207 firms from 22 different US industries. They constructed a survey index of culture
strength. They then calculated measures of economic performance for their sample of
companies. These included:
. average yearly increases in net income;
. average yearly increases in return on investment; and
. average yearly increases in stock prices.
Then they examined the relationship between the performance measures and the culture
strength measure. They found a positive correlation between corporate culture and long
term economic performance. They stated (Kotter and Heskitt, 1992): Within the limits

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of methodology, we conclude from this study that there is a positive relationship
between strength of corporate culture and long term economic performance.
In a related but different type of empirical research study, Flamholtz (2001) found
that culture can account for as much as 46 percent of earnings before interest and
taxes (EBIT). The research by Flamholtz (2001) differed from the prior research by
Kotters and Heskitt (1992) in that it utilized data from a single company with
15 operating divisions, as opposed to cross sectional data. The intent of his study (the
first and to date the only one of its kind) was to determine whether corporate culture

has a significant impact on financial performance at the level of the firm. The
regression equation describing the relationship among variables was statistically
significant at the 0.05 level. This means that corporate culture has been shown to
impact the so-called bottom line of corporate performance financial results.
Flamholtz (2001) and Flamholtz and Narasimhan-Kannan (2005) have identified the
specific dimensions of corporate culture which impact financial performance. There are
five key dimensions of culture which have a statistically significant relationship to
financial performance:
(1) customer-client orientation;
(2) orientation toward employees;
(3) standards of performance and accountability;
(4) innovation and/or commitment to change; and
(5) company process orientation (Flamholtz and Randle, 2011).
Flamholtz and Narasimhan-Kannan (2005) conducted factor analytic studies which
have supported the validity of the proposed five factor framework. Taken together, the
significance of these of dimensions is that, based upon empirical research (Flamholtz,
2001; Flamholtz and Narasimhan-Kannan, 2005), they comprise the core elements or
ingredients that a culture must include to create an effective corporate culture.
10. Managing culture as a strategic asset
Given the role of corporate culture in the success of companies like Starbucks,
Wal-Mart, and Southwest Airlines, and its equally important role in the decline of
companies like AIG, it is critical that scholars as well as practicing managers and
understand the nature, functioning, evolution of corporate culture, and how to manage
it as a strategic asset.
10.1 Strong and weak and functional and dysfunctional cultures
We have previously referred to positive cultures as assets, and negative cultures as
liabilities or handicaps. In this section, we give a more precise definition of positive and
negative cultures by identifying their underlying dimensions.
This section provides a typology of cultural types based upon two key variables
that can be used to classify cultures: cultural strength and cultural functionality.
Cultural strength refers to whether a culture is strong or weak, as explained below.
Cultural functionality refers to whether a culture is functional or dysfunctional.
Companies differ in the extent to which they make an attempt to manage their
cultural messages (statements, pictures, culture brands, corporate icons, etc.).
Organizations that take the time to make explicit statements about their culture and

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create cultural icons (such as Walt Disney, or Bill Hewlett and Dave Packard) tend to
have strong cultures. The intention is to have people understand and embrace the
companys history and culture. A strong culture is one that people clearly understand,
can articulate, and embrace in the sense that they behave according to its dictates.
A weak culture is one that people will have difficulty in defining, understanding,
or explaining what the culture is. They will also not embrace it to the desired extent.
Although culture is everywhere and in everything, sometimes you enter
organizations where it is not easy to determine what business they are in. In such
environments, the decor is plain, almost non-descript. There are no clues to suggest
what the business does: no culture statements, no pictures about the business, no hint
of what business the company is in. This is characteristic of a company whose culture
is so ill-defined (almost a non-culture culture), a culture devoid of obvious cultural
symbols, that it is the apotheosis of a weak culture. It usually occurs by happenstance
rather than design. It is a marker (or signature) of a company that does not recognize
the importance of culture to people, either to members of the organization or to those
whom they do business with.
A cultureless company is an illusion. Just as an individual must have a

10

personality, a company must have a culture, even though it appears not to exist.
A company that appears cultureless is actually a company with a weak or ill-defined
culture. It is not possible for an organization to have no culture, just as it is not
possible for a person to have no personality. Nevertheless, we are using the term to
characterize a special kind of organization that seems devoid of culture.
Strong culture companies can be either positive (an asset) or negative (a liability).
If the companys values are constructive, then having a strong culture is an asset. If the
companys values are negative or dysfunctional, then having a strong culture will be a
liability. For example, the informal culture at Ford Motor Company during the late
1960s and early 1970s was captured in the statement made among employees that:
if you can get it to drive out the door, we can sell it! This was not a formal corporate
pronouncement, but a statement that was prevalent in conversations at the company. It
was a statement that contained an implicit lack of respect for the customer, and
suggested the lack of importance of true product quality. It was part of a
strong-dysfunctional culture toward customers at Ford. Although Ford later made the
pronouncement that Quality is Job 1, this was clearly a response to damage to its
brand when customers realized that Ford products had declined in quality. Ford has
labored for decades to overcome this stigma. In contrast (until recently), Toyota has
steadily increased its customer loyalty and overcome the once prevailing view that
products made in Japan were of inferior quality. It has accomplished this by a culture
that emphasizes perfection in the customer experience from the product to the sales
process and the service process as well (Liker and Hoseus, 2008). This reputation has
been severely tarnished by the so-called sudden acceleration problem experienced by
several makes of Toyota automobiles during the past few years.
The two factors of cultural strength (strong and weak) and cultural functionality
(functional and dysfunctional) can be combined into a two by two culture management
typology matrix, identifying four different combinations as shown in Table I. This tool
can be used to identify the type of culture present in a company.
We have classified Starbucks, Wal-Mart, and Google as strong-functional culture
companies. This does not mean that they are perfect companies. We have classified AIG

Assets and the

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87
and GM (prior to its rebirth in 2010) as strong-dysfunctional culture companies. It
remains to be seen what the current culture at GM is. We have classified Toyota prior to
2008 as a weak-functional company. On the surface it would have seemed that Toyota
was a strong-functional culture company, but its failure to live up to its own cultural
standards (expressed in the so-called Toyota Way) suggests that the culture was not
really as strong as it seemed. Specifically, it appears that the sudden acceleration
problems was known inside the company bust was not revealed to customers. This led
to the unprecedented public apology by Akio Toyoda, amember of the founding Toyoda
family (Vartabedian andHamberger, 2009). Specifically, Toyoda said that the company
had reached a moment of crisis in which they had not adhered to the principles of The
Toyota Way. In effect, Toyota had lost a critical strategic asset: its culture of perfection
in products and services.
10.2 The economic costs of the loss of cultural as a strategic asset at Toyota
The failure of people at Toyota to adhere to the Toyota Way was not merely an
ethereal breach of a set of abstract principles. It has serious practical and financial
consequences. For decades Toyotas strategic mission had been to become the no. 1
automobile manufacturer in the world. It achieved that objective but it was a spurious
and hollow victory.
As a result of the sudden acceleration problem, which was a symptom and
consequence of its failure to adhere to its own cultural values and norms, Toyota
suffered a decline in market share, in brand loyalty, and in enterprise value
(as measured in an approximately 50 percent decline in its stock price). Toyota is also

11

vulnerable to customer law suits for damages form its products. Clearly, this is a very
significant economic cost attributable to the loss of an intangible but real strategic
asset. In addition, Toyotas stumble has permitted US automobile makers to have
another chance to reestablish their own brand equity. Bottom line: the Toyota
experience again shows that corporate culture is a strategic asset or liability of great
real world economic consequence, and not just a theoretical abstraction. Even though
currently the value of corporate culture is not measured and reported in financial
statements, it has significant practical importance.
The culture typologymatrix shown inTable I can be used bymanagers to assesswhere
their company and their strategic business units or subsidiaries would fit in the four
quadrants. The ideal place (quadrant) would be strong-functional. Any other quadrant
suggests the need for action to better manage and improve the companys culture.
10.3 Cultural assets and liabilities summary
As seen above, corporate culture can either be an asset or a liability (in the sense of a
strategic weakness or handicap). It is a major asset and source of sustainable
competitive advantage if it is a strong and functional culture. It is somewhat
Culture factors Functional Dysfunctional
Strong Starbucks AIG
Wal-Mart GM (pre-2010)
Google
Weak Toyota (pre-2008) Toyota (2008-)
Table I.
Cultural typology matrix

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of an asset if it is a weak-functional culture. It is a major liability and source of ongoing
competitive disadvantage if it is a strong and dysfunctional culture. It is somewhat
of a liability if it is a weak and dysfunctional culture. This set of possibilities is
summarized in Table II.
11. Critical role of performance measurement of culture
As is well recognized in accounting and management generally, measurement is
critical to effective management (Kaplan and Norton, 1992; Meyer, 2002; Flamholtz,
2003). However, this is especially true with intangible assets and intellectual property
such as corporate culture (Dumay and Cuganesan, 2011).
The challenge with including culture in performance measures is, as always, to
develop appropriate performance measurements of culture. The measurement of
culture can be performed using behavioral measurement tools previously developed
(Flamholtz, 2001; Flamholtz and Randle, 2011).
11.1 Measuring corporate culture
One precept of management states that if you cannot measure something you cannot
manage it. Through our research and experience we have developed methods of
measuring corporate culture, which are described below.
Culture can be measured using surveys with Likert type scales. This is shown in
Figure 1.
Culture factors Functional (assets) Dysfunctional (liabilities)
Strong Sustainable strategic asset Major strategic weakness
Weak Strategic asset Strategic weakness
Table II.
Cultural typology matrix
Figure 1.
Sample culture survey
We keep our commitments to our
customers/business partners.
Our people are the Companys
most valuable asset.
Our company reacts quickly to
changes in the marke tplace.
Our leaders act and communicate
with integrity.
People are rewarded based on their

12

performance.
Good planning is rewarded.
Company policies are applied
consistently.
Changes that affect employees are
communicated quickly and
effectively.
Current Culture Desired Culture
Current Statement
1.
2.
3.
4.
5.
6.
7.
8.
To A
Very
Slight
Extent
To A
Slight
Extent
To Some
Extent
To A
Great
Extent
To A
Very
Great
Extent
To A
Very
Slight
Extent
To A
Slight
Extent
To Some
Extent
To A
Great
Extent
To A
Very
Great
Extent

Assets and the

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89
Using this method of measurement, we can present a series of culture statements to
potential respondents and collect their assessment of the degree to which they agree
with the proposed or desired culture and also the extent to which see those things are
actually practiced in an organization (Figure 1). For example, Figure 1 includes the
statement: We keep our commitments to our customers/business partners. This is a
culture statement that would be related to the customer orientation dimension of
culture. There are two aspects of the survey:
(1) the extent to which people agree with the proposed value; and
(2) the extent to which they see it practiced in the firm.
The output of this measurement method is a set of measurement as of corporate
culture. It also enables the measurement of gaps between the desired strategic culture
and the actual or real culture (Flamholtz and Randle, 2011).
These measurement methods are also relevant to the disclosure gap with respect
to human capital accounting literature identified by Samudhram et al. (2010).
11.2 Measuring the effectiveness of a stated culture
The culture survey can be used to measure the effectiveness of the culture in two
ways:
(1) the extent to which the stated culture is embraced by people; and
(2) the extent to which actual behavior in the organization is consistent with the
stated culture.
By asking respondents about the extent to which they agree with a value and believe
it ought to be part of the ideal or desired culture, we have a method for measuring the
extent to which the stated culture is embraced by people. By asking respondents about
the extent to which they see it actually practiced in the current or existing culture,
we have a way to measure the extent to which the behavior in the organization is
consistent with the stated culture.

13

11.3 Measuring culture gaps

This measurement tool also provides a way to measure culture gaps, the difference
between the proposed (desired) and actual cultures. The culture gap is a measure of the
extent to which the company has been successful in helping people embrace and
practice its stated culture.
11.4 Performance measurement of culture and the balanced scorecard
Drawing upon these behavioral measurement methods, Flamholtz (2003) has previously
proposed to include corporate culture in performance measurement in a revised version
of the balanced scorecard. This, in turn, will help correct some of the limitations of the
balanced scorecard, as identified by Meyer (2002) and Flamholtz (2003).
The fundamental aimunderlying the so-called balance scorecard proposed byKaplan
andNorton (1992, 1996), is sound. It attempts to provide amore comprehensive perspective
for performance measurement than simply financial results. However, one major
limitation of the so-called balance scorecard is that its four proposed perspectives have
not been subjected to empirical test of validity of any kind (Flamholtz, 2003).Without such
empirical support, there are merely in effect, hypothesized perspectives. Meyer (2002)

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also argues for the need to validate proposed performancemeasures.Another limitation of
the Kaplan-Norton version of the balanced scorecard is that it does not include corporate
culture.
Flamholtz (1995, 2003) has proposed an alternative model for a balanced scorecard.
The model proposed by Flamholtz (1995) has been subject to extensive
empirical testing, and all empirical tests have supported its validity (Flamholtz and
Aksehirli, 2000; Flamholtz, 2001, 2002-2003; Flamholtz and Hua, 2002a, b, 2003;
Flamholtz and Kurland, 2005). The model proposed by Flamholtz (1995, 2003) includes
corporate culture explicitly as a variable relevant to the assessment of balanced
performance.
Accordingly, Flamholtz (2003) has proposed that the Kaplan-Norton version of the
balance scorecard be replaced by a version using his model, which has been subject to
considerable empirical testing and support, and also explicitly include corporate
culture as a dimension of performance.
As Meyer (2002) points out, one major problem with the balanced scorecard version
proposed by Kaplan and Norton (1992, 1996) is that it is now used for purposes for
which it was not originally intended. As he states:
Although the scorecard was conceived as a means of communicating the firms strategy rather
than a template for performance measurement, today the scorecards dominates discussions of
performance measurement, and compensation is routinely based on scorecard measures.

12. Concluding comments

Corporate culture we cannot see it, touch it, smell it, taste it or hear it, but it is there. It
pervades all aspects of organizational life and it has a profound impact upon
organizational success and failure. If it is managed well, it can be a real economic and
strategic asset. If it is managed incorrectly or allowed to deteriorate it can become a
true liability or strategic disadvantage. Both of these states of culture development
can be measured in financial performance and are reflected in differential shareholder
value, as we saw with Wal-Mart and K-Mart.
Currently corporate culture is not measured or reported in financial statements,
either in internal statements or external financial reports to shareholders, potential
investors, bankers, or others. However, it is possible to measure corporate culture as a
strategic asset. Reporting it as an asset in financial statements for external purposes
would require a significant change in accounting methods; but it could be measured
and reported for internal purposes (Flamholtz, 2005). It will, however, require new
ways of thinking about the role of measurement and perhaps the entire accounting
paradigm (Roslender, 2009).

14

The development, evolution and management of corporate culture are elusive but
critical processes in organizations at all stages of growth. Culture is not static, and it is
sometimes an extraordinarily valuable intangible asset, while at others it is a true
liability. It can also transform from an asset into a liability, as we have seen with
Toyota.
This article has attempted to address the theoretical, practical, and measurement
issues to explain the role of corporate culture in business models, as a strategic asset,
and how it impacts the so-called bottom line of financial performance. The
management of corporate culture is complex; but the processes that create and sustain
this invisible construct can make it potentially the ultimate strategic asset. As we have

Assets and the

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91
seen in the case of Starbucks Coffee, which today totally dominates the retail coffee
cafe business throughout the world, culture can be the critical component of a
successful business model.
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Corresponding author
Eric G. Flamholtz can be contacted at: ef@mgtsystems.com

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Emerald Article: Corporate culture, business models, competitive
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Eric G. Flamholtz, Yvonne Randle
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To cite this document: Eric G. Flamholtz, Yvonne Randle, (2012),"Corporate culture, business models, competitive
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Corporate culture, business

models, competitive advantage,
strategic assets and the
bottom line
Theoretical and measurement issues
Eric G. Flamholtz and Yvonne Randle
Anderson School of Management, UCLA, Los Angeles, California, USA
Abstract
Purpose This paper seeks to enhance understanding of the role and effect of corporate culture as a
unique strategic asset on the success of business models.

17

Design/methodology/approach The paper is a conceptual exploration of several key constructs

and their interrelationship. The argument is based on four related notions: that corporate culture is an
asset; that it is a strategic asset in the sense of comprising a source of competitive advantage; that
it might well be the ultimate strategic asset; and that culture as a strategic asset can be the essence or
core of a business model. The paper also uses empirical examples of actual companies to study and
demonstrate the core constructs and ideas. It also examines issues involving the key dimensions
of corporate culture, the measurement of corporate culture, and certain related performance
measurement issues.
Findings The paper shows that corporate culture is a strategic asset, which, if managed properly,
can be the key differentiating factor in a successful business model. It also shows that when not
managed properly, can actually transform into a liability.
Practical implications This paper demonstrates that corporate culture is a critical strategic asset
because of its role in creating competitive advantage and successful business models. It suggests that
corporate culture can also be the single most important source of competitive advantage in business
models. Finally, it suggests that practicing leaders as well as investors and academics need to pay
attention to corporate culture as a component of business strategy.
Originality/value This paper contributes to the literature and to practice by examining the notion
that corporate culture is a strategic asset in depth and examining the relationship between culture as a
strategic asset and business models. It also takes steps towards a coherent framework for both
scholars and practicing managers to frame and understand the issues involved in the management and
measurement of this critical strategic asset.
Keywords Corporate culture, Assets, Strategic asset, Ultimate strategic asset, Business models,
Performance measurement, Organizational culture
Paper type Research paper

1. Introduction
Few managers or management scholars would question the critical role of corporate
culture in organizational performance (Kotter and Heskitt, 1992; Deal and Kennedy,
1982; Schein, 1992; Flamholtz, 2001; Sackmann, 2006). Culture is well understood to
impact human resources, and comprises a key aspect of human resource management.
However, what is less recognized is that corporate culture is a true strategic asset, and
it might well be the ultimate strategic asset for many, if not all, companies in todays
The current issue and full text archive of this journal is available at
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economy, especially in the advanced nations. As a result, then, culture is or, at the very
least, can be a critical component of a successful business model just as other forms of
intellectual capital (Ratnatunga et al., 2004). As Dumay and Cuganesan (2011) state,
identifying and measuring intellectual capital is important to contemporary
organizations because intangibles create value and true competitive advantage.
There are four critical interrelated notions here:
(1) that corporate culture (culture) is an asset;
(2) that it is a strategic asset in the sense of comprising a source of competitive
advantage;
(3) that it might well be the ultimate strategic asset; and
(4) that culture, as a strategic asset, can be the essence or core of a business model
(Barney, 1986; Flamholtz and Randle, 2011).
We will examine each of these notions and their interrelationship in turn. First
however, we will define the concept of corporate culture.
2. The concept of corporate culture
The concept of corporate culture has become embedded in management vocabulary
and thought. In order to manage it, we must first understand what culture is and what
it is not.
Although there are many different definitions of the concept, the central notion is

18

that culture relates to core organizational values. In turn, values are things which are
important to organizations and underpin decisions and behavior. All organizations
have cultures or sets of values which influence the way people behave in a variety of
areas, such as treatment of customers, standards of performance, innovation, etc.
To us, corporate culture consists of values, beliefs, and normswhich influence the
thoughts and actions (behavior) of people in organizations. Values, beliefs, and norms, are
then, the key components or elements that define a corporate culture. Values are the things
an organization considers most important with respect to its operations, its employees,
and its customers. These are the things an organization holds most dear the things for
which it strives and the things it wants to protect at all costs. Beliefs are assumptions
individuals hold about themselves, their customers, and their organization. Norms are
unwritten rules of behavior that address such issues as howemployees dress and interact.
Norms help operationalize actions which are consistent with values and beliefs.
These three elements of culture are actually part of an overall mosaic of culture in
an organization. They are not necessarily all visible either single or in combination.
There are actually several levels or layers of culture in an organization. There is the
surface layer which is what we see and observe, mostly in the norms of behavior on a
day to day basis. Then there are the core values and related beliefs or assumptions
which drive or underlie the behavioral norms. However, below that is what might be
termed a set of cultural attributes, which are the DNA of culture. These cultural
attributes are dimensions of corporate personality. These are things such as attitudes
towards risk, or ethics; propensity towards planning (or not!), systems, processes;
attitudes towards professionalism, or entrepreneurialism, or even bureaucracy. These
underlying cultural attributes drive the core beliefs, values, and norms which
constitute the most observable level of culture.

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3. Culture as an asset and/or liability
The classic notion of an asset is that it is something of value owned or controlled by a
business enterprise. Assets can be tangible like plant and equipment or intangible like
brands, intellectual property, or customer loyalty, the latter being a form of goodwill.
Like goodwill, corporate culture is an intangible but very real economic asset of
business enterprises. For the companies which possess a strong positive culture like
Starbucks, Southwest Airlines, Wal-Mart or Google, it is a true asset, if not in the
strict accounting sense, then in the real economic sense, meaning that it leads to
measurable differential profitability.
It should also be noted that a case can be made that corporate culture is actually an
asset in the accounting sense as well. Specifically, Flamholtz (2005) has proposed that
corporate culture is an asset in the accounting sense. The classic measurement of the
value of an economic asset or resource is the discounted value of expected future
earnings. Flamholtz (2001, 2005) has shown that corporate culture can impact earnings
and thereby meets this criterion.
Thus, we view corporate culture as one of the three components of overall human
capital. The primary dimension of human capital (and the one generally equated with
the notion of human capital are the skills or competencies of individuals. In addition
to this primary dimension of the individual as a form of human capital, a traditioned
group (in the true sociological sense) also comprises an asset and another form of
human capital (Flamholtz, 1995, 1999). The development of a true team in the
sociological sense takes time, effort, and money. Flamholtz (2011) has shown that such
a team or group of people can be a positive contributor to organizational effectiveness.
The third form of human capital is corporate culture. Culture is an intangible asset,
a form of intellectual property. If a positive culture exists, it functions as an
intangible asset. If a negative culture exists, it functions as a drag on performance,
and can quite possible lead to an organizations demise.

19

Thus, when a company like Starbucks or Wal-Mart has a positive corporate culture
it can, as we shall see, generate positive differential earnings, which is per se an asset.
On the contrary, for other companies with dysfunctional cultures like AIG, K-Mart,
and (for the past 50 years or so) General Motors, their corporate cultures are true
economic liabilities, if not in the accounting sense, then in the colloquial sense of that
term. In companies with dysfunctional cultures, earnings are less than what they
might otherwise be, thereby incurring real opportunity costs.
This dual role of culture as an asset or liability is shown clearly in
the examples of two companies: Starbucks and AIG. The former is a classic success
story with a strong positive culture that is an economic asset, while the latter is
a classic case of a dysfunctional corporate culture that led it to a precipitous
decline in economic fortune and was only prevented from bankruptcy by being too big
to fail.
3.1 Culture as an asset: the example of Starbucks
For many people, Starbucks Coffee Company is an enigma. How does a company with
a commodity product that has existed for centuries if not millennia rise from nothing to
become a firm with more than $10 billion in revenues?
When asked to explain the success of Starbucks, one of the great entrepreneurial
success stories of the last 20 years, Schultz (1994), founder and CEO, has stated that:

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When people ask me about the reasons for Starbucks success, I tell them not what they expect
to hear. I tell them that it was the people at Starbucks and the way we managed them that was
the true differentiating factor.

Similarly, Behar (2008), former Executive VP of Operations for Starbucks and

President of Starbucks International, has stated very clearly in his book about
Starbucks that the companys success is about leadership and culture rather than its
product; as the title of the book states: Its not about the coffee!
The key point is that the real differentiating factor in Starbucks success is not its
coffee per se; the coffee comes from beans which are a commodity. Starbucks does not
have a proprietary coffee bean, or a proprietary roasting process, which magically
produces a superior coffee bean and beverage; rather, what is does have is a distinctive
and superior culture that influences the behavior of people and comprises an intangible
but real economic asset. Starbucks has become a global brand, and the leader in its
space, with more than $10 billion in revenues in 2011. This has been accomplished by
managing its corporate culture, an intangible but real economic asset.
3.2 The liability and cost of a dysfunctional culture: the example of AIG
If Starbucks is the apotheosis demonstrating how a positive culture can be an asset,
then AIG is one of many examples of how culture can become dysfunctional and lead
to severe economic distress if not actual collapse. Once recognized as a leading
company, AIG was at the center of the financial crisis that affected not only the USA
but also the entire financial system. AIG is almost 100 years old (it was founded in
1919), is listed on the New York Stock Exchange (NYSE), and was led for decades by
Maurice Hank Greenberg, a respected business leader (Flamholtz and Randle, 2011).
The precipitous decline of AIG is directly attributable to a toxic corporate culture,
which failed to permit people to challenge complex financial transactions. As Dennis
and OHarrow (2009) have observed, the rapid decline of AIG was attributable to
overexposure to the now infamous Credit Default Swap, one of the financial products
referred to by Warren Buffet as a financial weapon of mass destruction! Using
econometric models based upon years of historical data about the variation in
corporate debt, AIG concluded that there was a 99.85 percent chance of never having to
pay out any insurance on credit default swaps. Assuming that total economic collapse
would not occur, it seemed that AIG could earn millions of dollars with virtually no
risk, a classic economic free lunch, (which of course is not supposed to exist in the

20

real world and, in fact, was actually a statistical mirage)!

In fact, it was not just a failure of statistical analysis at AIG that led to its near ruin; it
was the failure to adhere to a core cultural norm that led virtually to disaster. Under
leadership of Greenburg, the normwhich had been embedded in the culturewas that just
about anyone could question a trade.This led to a strong-functional culture that helped to
avoid undue risks. However, according to people who worked for the firm, under Frank
Cassano, the then leader of AIGs Financial Products Group, the norm that anyone could
question a trade would change and be abrogated, leading to a dangerous culture which
embraced great risks without adequate understanding of the potential consequences
(Dennis and OHarrow, 2009). There were doubters atAIG, who questioned the wisdomof
credit default swaps and the magnitude of the companys commitments to those esoteric
financial products; but they remained silent, cowed by Cassano and his enthusiasmfor this
spurious notion of an apparently free lunch! The net result was that credit default swaps

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became a toxic product for AIG, the poisoned fruit of a culture that had transformed from
one of open discussion into a dysfunctional culture that avoided challenging the
powerful leader Cassano and his pet ideas and products.
Virtually all that prevented AIG from total economic collapse as a company was
that it was deemed to be to big (to be allowed) to fail. AIGs products were so
embedded in the financial system that it was deemed to be too great a risk to allow the
company to fail.
4. Strategic assets
Not all assets are strategic assets. For example, a computer might be an asset, but it
is not typically a strategic asset, because it is essentially a commodity product that can
be purchased by other firms.
A strategic asset is an asset that provides a source of sustainable competitive
advantage. We propose two criteria for something to be a strategic asset:
(1) it must provide a competitive difference; and
(2) it must be sustainable for at least a period to exceed two years.
The first criterion is that to be a strategic asset the asset must provide some differential
benefit to a firm. A brand, though intangible, can be a strategic asset. It is well
established that a brand is an asset, and that a brand can have great economic value.
What makes a brand a strategic asset is that it can be a source of preference for present
and potential customers. For example, when someone says, as the authors actually
overheard, lets go to Starbucks rather than saying lets go for a coffee or
Cappuccino; that demonstrates the power and differential benefit of a brand.
Similarly, when someone ask for a Coca Cola rather than a carbonated soft drink or
a Pepsi that too demonstrates the benefit of a brand.
A strategic asset must also be sustainable. Our operational definition of
sustainability is that something must be able to last for a minimum of two years for
it to be deemed a strategic asset; this is analogous to the criterion for a fixed asset in
accounting. As a result the so-called first mover advantage (which is a real
advantage) is not necessarily a source of sustained competitive advantage. It can be
countered by late movers which improve upon a product and render the first mover
advantage meaningless. For example, Apple has severely wounded Rims Blackberry,
if not rendered it virtually obsolete, or at least it, by its own innovation of the I-phone.
Another aspect of sustainability is the difficult of imitating the strategic asset. The
more difficult something is to copy, the greater the degree of sustainability.
Similar to the above discussion, Barney (1986, 1991, 2002) has noted that the
resource based view of strategy suggests that something will provide a sustained
competitive advantage when it meets three criteria:
(1) it is important to the company because it has a positive effect on profits;
(2) it is difficult to imitate; and

21

(3) it is scarce.
4.1 The nature of culture as a strategic asset
Our proposition is that culture is a strategic asset. Culture functions as a strategic asset
in several ways.

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One key is the impact culture has upon the ability to attract, motivate and retain
people, which comprise the human capital of an enterprise. Some firms are known for
being attractive places to work, that is having positive cultures. In fact, some
companies compete to be recognized as one of the so-called best places to work.
This, in turn, enables a company to attract the best and the brightest talent. The
authors have seen this in action at many companies. For example, when Starbucks
(already known in its early years as having a good culture) was seeking to hire a
senior human resources executive and placed, an advertisement in the Wall Street
Journal, there were more than 600 applicants, including three from the same firm!
Culture not only serves to attract people, if often can serve to retain them as well.
In the case of a home builder which was recognized by employees for a very favorable
culture, the company was actually able to offer less compensation than competitors
without losing people. Since it is costly to recruit and train people, this ability to retain
human capital is a strategic asset as well (Flamholtz, 1999).
For these reasons, companies are increasingly recognizing that an employee
brand (the branding of its culture) is a strategic asset or competitive weapon just as
important as or even more important than other factors.
5. Culture as a strategic asset: the case of Wal-Mart and K-Mart
We believe that culture is a true strategic asset. It is a true source of competitive
advantage, and results in differential corporate performance which can be measured in
financial results. This can be demonstrated in the example of the success of Wal-Mart
versus K-mart below.
On the surface, there are no major differences between Wal-Mart and its major
competitor K-Mart. Both companies market to the same customers, and there are no
products that Wal-Mart has that K-Mart does not have. As a walk through these stores
will demonstrate to the observer, they both sell exactly the same things: Johnsons Baby
Powder, Allergan lens solution, Colgate Toothpaste, and other consumer disposables
and staples. They both have the same kinds of stores and they operate in similar
geographic locations. They recruit from the same pool of people. Yet in spite of these
similarities, Wal-Mart has produced a vastly different financial result for investors than
K-Mart. It is true that today Wal-Mart has a significantly greater scale than K-Mart;
however, when Wal-Mart was founded the reverse was true, and yet Wal-Mart
has come to dominate K-Mart even though the later had the original first mover
advantage.
In addition, the financial return to investors measured in terms of stock prices
differs greatly between the two firms (Flamholtz and Randle, 2011). In the decade of the
1990s, the stock price of K-Mart almost doubled. An original investment of $10,000
would have been worth almost $20,000 by 1999. This was a reasonable return,
but possibly less than what might be expected for this type of company. During
the same period, the stock price of Wal-Mart increased several fold. Specifically,
an investor who made an original investment of $10,000 in 1990 would have seen the
value of that investment increase to approximately $280,000! This is an astounding
difference, especially when these companies are not like Microsoft or Amgen, where
there are proprietary products or proprietary intellectual property. If we carry our
analysis a little further to the end of 2003, then the results are even more dramatic.
By the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his

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81
or her investment. While Wal-Marts stock price did decline as a result of the market
collapse from 1999 to 2003, the original investment of $10,000 would still have been
worth just under $200,000.
Wal-Mart and K-Mart are selling essentially the same commodities, but with vastly
different financial performance results. What explains that? Soderquist (2005), the
former Vice Chairman and Chief Operating Officer of Wal-Mart, now retired, attributes
the companys success to its culture. We believe that Soderquist is correct, and that
much of the explanation of the differential financial value between these two
companies is attributable to cultural differences between the two companies.
This is not to suggest that Wal-Mart is a perfect or even a model company. There
have been numerous criticisms and lawsuits against Wal-Mart. Nevertheless, from an
economic standpoint of organizational success; Wal-Mart is clearly a superior
organization, clearly the economic victor versus K-Mart, and clearly the dominant
player in its market space.
It is in this sense that its culture is a true strategic asset for Wal-Mart. Corporate
culture is the key competitive difference between the two companies, and is to a very
great extent the reason for the difference in success of these two otherwise virtually
identical companies.
This example also shows that culture also meets the criteria Barney (1991) has
articulated for a sustained competitive advantage:
. it is important to the company because it has a positive effect on profits;
. it is difficult to imitate; and
. it is scarce.
The Wal-Mart culture haws a positive effect on profitability vis a vis its competitor
K-Mart. It is difficult, possibly impossible, to imitate. It is also scarce in the sense of
being relatively rare as a phenomenon. It also is has scarcity value because culture is
difficult and costly to create and manage, especially in larger organizations. We will
address this last issue below.
6. The ultimate strategic asset
Unfortunately, most assets, even strategic assets, are ultimately perishable. The reason
for this is that it they can be copied, or in the case of intellectual property they can be
worked around. For example, even a patented molecule in biotech can be defeated
by another pharmaceutical firm with slightly differentiated products.
Most of the things over which organizations compete can be copied or neutralized by
competition. Products can be imitated or improved upon. Financial resources are fungible.
Many companies have capable people, which neutralize this as a competitive advantages.
The ultimate strategic asset would need to be something that is not only
not-perishable; but it must also be something that cannot be imitated easily if at all by
competition. Ideally it would be something that is invisible to competition so that they
cannot visualize what it is and therefore increase the difficulty of copying it.
7. The rationale for culture as the ultimate strategic asset
Barney (1991) has proposed, and we agree, that a companys culture can be a stronger
source of sustained competitive advantage than products or services, because unlike

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the latter it cannot be imitated. In our view, however, culture is not just a strong source
of sustainable advantage; it is the ultimate source of sustainable advantage, and, in
turn, the ultimate strategic asset. Building upon the discussion above, here is our
argument in brief:
We have explained that organizational cultures, which are inimitable, are a source
of sustainable competitive advantage for firms (Barney, 1986). A companys culture

23

if well managed is transmitted to generations of employees through the companys

DNA, thus perpetuating this source of competitive advantage. This makes it a
sustainable strategic advantage.
Corporate culture represents the one thing that a firm has that is ultimately not
susceptible to imitation or duplication by another company. Although it is possible to
clone sheep, it is not simple to do. Similarly, it is not simple, and (we believe) virtually
impossible to clone a firms culture. Even when a company tries to copy a culture, it is
not possible to duplicate it exactly. The unique circumstances of every companys
situation and history make cloning another culture a virtually impossibility. Difference
in leadership personalities, size, historical experiences, and a variety of other factors all
combine to make a corporate culture unique. Attempts to copy of clone it will lead to
artificial cultures which do not fit. For example, in one instance with which we are
familiar, a competitor to PowerBar (now owned by Nestle) perceived that culture was
an asset for PowerBar. Not truly understanding what was being done to create and
manage PowerBars special culture, the competitor misconstrued what it was and
spent more than $1 million trying to copy PowerBars physical facilities for employees
rather than the invisible culture management process that PowerBar had created with
our assistance (Flamholtz and Randle, 2011).
Corporate culture is, then, not just a source of competitive advantage; it actually
seems to be the ultimate source of true sustainable competitive advantage. This is
because of the extreme difficulties, if not impossibility, of replicating culture across
organizations. In addition, it is a relatively an invisible strategic asset. The fact that
culture is difficult is difficult to see relatively makes it function as a stealth
competitive weapon.
The bottom line is that corporate culture can thus be viewed as the ultimate
strategic asset because of its unique attributes.
8. Culture as a strategic component of business models
In order to explain the role that culture can play in a business model, we must first define
what we mean by the term business model itself. During the past several years, the
concept of a business model has received a great deal of both academic and practitioner
attention (Zott et al., 2011). The concept of a business model is widely used in business
and academic literature; however, as Zott et al. (2011) point out in their comprehensive
review and critique of the business model literature, it appears that there has yet to
develop a generally accepted definition of that term and related language that can be
used to communicate about and analyze business models systematically. As they state:
[. . .] scholars do not agree on what a business model is. This means that one persons
business model might not fit with another person conception of what a business model
is. As we shall explain below, this has direct relevance to our notion that corporate
culture can be the essential ingredient in a business model.

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Although there is no generally accepted agreement about the meaning of the
construct of a business model, there do appear to be certain common elements in many
versions of this construct. The three common elements (either explicit or implicit) are:
(1) target (customer) markets;
(2) a mechanism of delivering a product or service via the use of resources and
organizational processes (termed a business architecture); and
(3) value derived for the enterprise and its stakeholders (Zott et al., 2011; Teece,
2010; Johnson et al., 2008; Timmers, 1998).
Consistent with these core elements, as used here, a business model refers to the
entirety of the processes from the selection of a market to the delivery of a product or
service by means of a specified (constructed) business architecture.
A business model can of itself be a source of competitive advantage, as seen in the
many examples of disruptive competition by internet (web) based companies like

24

Amazon.com. For example, the emergence of Amazon.com has literally driven

borders (retail book stores), with its classic brick and mortar business model, into
bankruptcy.
In addition to competition with business models per se, organizations compete on
many levels with many different strategic assets. They compete not only in terms of
products and services, but also with brands and other strategic factors of production
(such as human capital and intellectual property) as well.
One of the key components of a business architecture or organizational
infrastructure is corporate culture. It is increasingly recognized the culture is a key
strategic asset and a basis of competition among firms (Barney, 1986, 1991, 2002;
Flamholtz and Randle, 2011).
The special features of corporate culture which combine to make it the ultimate
strategic asset, in turn, lead to it becoming a powerful basis for a business model.
There are three specific attributes of culture that make it a candidate for competitive
differentiation in a business model:
(1) corporate culture is difficult and costly to develop;
(2) once developed it can be maintained and is not inherently perishable; and
(3) to a very great extent, it is not readily visible to the casual observer, making it
difficult to copy.
This has led some companies such as Starbucks, Southwest Airlines, Google and
Wal-Mart, among others, to view culture as a core component (if not the core component)
of their overall business model and strategy. In effect, their business models are built
around culture as the core strategic asset. We will return briefly to the example
of Starbucks and provide some additional material. We will also examine how
Southwest Airlines, a very different business, utilizes corporate culture in its business
model.
8.1 Culture in the business model of Starbucks
As we have alluded to above, corporate culture is at the core of Starbucks business
model. The companys product is nominally coffee and coffee beverages; but the real
product as articulated by Schultz and Jones Yang (1997) is the experience of the

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so-called third place. The basic syllogism underlying Starbucks culture is: the way
we treat our people affects the way they treat our customers, and in turn, our financial
performance.
Stated differently, Starbucks realizes that the key source of its competitive difference
is the way it treats its people, a key part of its culture. This in turn is influences the way
that its people take care of customers (another cultural dimension). Thus, Starbucks is
not competing on coffee, as Behar (2008) has noted; Starbucks is competing on the basis
of culture. Its business model is built around its culture!
8.2 Culture in the business model of southwest airlines
Like Starbucks, Southwest Airlines (or other airlines like Lufthansa, British Airways,
Singapore Airlines or United Air Lines) provide what is essentially a commodity
product air travel. They use equipment fromone of twomajor aircraft manufacturers:
Boeing and Airbus. Since the aircraft for the same routes are virtually identical, airlines
devote a great deal of effort to creating a perceived difference in their airlines service and
their brand. This is where corporate culture can (and typically does) play a critical role.
They way that airline personnel treat their customers is a critical manifestation of
its culture. Southwest Airlines, a major US domestic carrier, emphasizes customer
service not only in its advertising but also to its employees as a key competitive
differentiator.
Starbucks, Southwest Airlines, Google and Wal-Mart, among others, have built
their business models are built around culture as the core strategic asset. It has also led
them to superior financial performance in their respective spaces, which is the ultimate

25

measure of the value of an asset.

This has important implications for both theory and practice, which we will
examine in a subsequent section.
9. The cost and value of corporate culture as a strategic asset
As noted above, Barney (1986) has stated that the resource based view of strategy
suggests that one criterion of a sustained competitive advantage is that the things
under consideration s must have a positive effect on profits. Culture has been shown to
have a direct statistically significant impact on the bottom line of corporate financial
performance (Kotter and Heskitt, 1992; Flamholtz, 2001).
Kotter and Heskitt (1992) provided some of the first empirical evidence of a
statistically significant relationship between culture and financial performance. Their
intent was to test the prevailing assumption of a link between strong cultures and
superior financial performance. In their cross sectional research study, they selected
207 firms from 22 different US industries. They constructed a survey index of culture
strength. They then calculated measures of economic performance for their sample of
companies. These included:
. average yearly increases in net income;
. average yearly increases in return on investment; and
. average yearly increases in stock prices.
Then they examined the relationship between the performance measures and the culture
strength measure. They found a positive correlation between corporate culture and long
term economic performance. They stated (Kotter and Heskitt, 1992): Within the limits

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of methodology, we conclude from this study that there is a positive relationship
between strength of corporate culture and long term economic performance.
In a related but different type of empirical research study, Flamholtz (2001) found
that culture can account for as much as 46 percent of earnings before interest and
taxes (EBIT). The research by Flamholtz (2001) differed from the prior research by
Kotters and Heskitt (1992) in that it utilized data from a single company with
15 operating divisions, as opposed to cross sectional data. The intent of his study (the
first and to date the only one of its kind) was to determine whether corporate culture
has a significant impact on financial performance at the level of the firm. The
regression equation describing the relationship among variables was statistically
significant at the 0.05 level. This means that corporate culture has been shown to
impact the so-called bottom line of corporate performance financial results.
Flamholtz (2001) and Flamholtz and Narasimhan-Kannan (2005) have identified the
specific dimensions of corporate culture which impact financial performance. There are
five key dimensions of culture which have a statistically significant relationship to
financial performance:
(1) customer-client orientation;
(2) orientation toward employees;
(3) standards of performance and accountability;
(4) innovation and/or commitment to change; and
(5) company process orientation (Flamholtz and Randle, 2011).
Flamholtz and Narasimhan-Kannan (2005) conducted factor analytic studies which
have supported the validity of the proposed five factor framework. Taken together, the
significance of these of dimensions is that, based upon empirical research (Flamholtz,
2001; Flamholtz and Narasimhan-Kannan, 2005), they comprise the core elements or
ingredients that a culture must include to create an effective corporate culture.
10. Managing culture as a strategic asset
Given the role of corporate culture in the success of companies like Starbucks,
Wal-Mart, and Southwest Airlines, and its equally important role in the decline of
companies like AIG, it is critical that scholars as well as practicing managers and

26

understand the nature, functioning, evolution of corporate culture, and how to manage
it as a strategic asset.
10.1 Strong and weak and functional and dysfunctional cultures
We have previously referred to positive cultures as assets, and negative cultures as
liabilities or handicaps. In this section, we give a more precise definition of positive and
negative cultures by identifying their underlying dimensions.
This section provides a typology of cultural types based upon two key variables
that can be used to classify cultures: cultural strength and cultural functionality.
Cultural strength refers to whether a culture is strong or weak, as explained below.
Cultural functionality refers to whether a culture is functional or dysfunctional.
Companies differ in the extent to which they make an attempt to manage their
cultural messages (statements, pictures, culture brands, corporate icons, etc.).
Organizations that take the time to make explicit statements about their culture and

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create cultural icons (such as Walt Disney, or Bill Hewlett and Dave Packard) tend to
have strong cultures. The intention is to have people understand and embrace the
companys history and culture. A strong culture is one that people clearly understand,
can articulate, and embrace in the sense that they behave according to its dictates.
A weak culture is one that people will have difficulty in defining, understanding,
or explaining what the culture is. They will also not embrace it to the desired extent.
Although culture is everywhere and in everything, sometimes you enter
organizations where it is not easy to determine what business they are in. In such
environments, the decor is plain, almost non-descript. There are no clues to suggest
what the business does: no culture statements, no pictures about the business, no hint
of what business the company is in. This is characteristic of a company whose culture
is so ill-defined (almost a non-culture culture), a culture devoid of obvious cultural
symbols, that it is the apotheosis of a weak culture. It usually occurs by happenstance
rather than design. It is a marker (or signature) of a company that does not recognize
the importance of culture to people, either to members of the organization or to those
whom they do business with.
A cultureless company is an illusion. Just as an individual must have a
personality, a company must have a culture, even though it appears not to exist.
A company that appears cultureless is actually a company with a weak or ill-defined
culture. It is not possible for an organization to have no culture, just as it is not
possible for a person to have no personality. Nevertheless, we are using the term to
characterize a special kind of organization that seems devoid of culture.
Strong culture companies can be either positive (an asset) or negative (a liability).
If the companys values are constructive, then having a strong culture is an asset. If the
companys values are negative or dysfunctional, then having a strong culture will be a
liability. For example, the informal culture at Ford Motor Company during the late
1960s and early 1970s was captured in the statement made among employees that:
if you can get it to drive out the door, we can sell it! This was not a formal corporate
pronouncement, but a statement that was prevalent in conversations at the company. It
was a statement that contained an implicit lack of respect for the customer, and
suggested the lack of importance of true product quality. It was part of a
strong-dysfunctional culture toward customers at Ford. Although Ford later made the
pronouncement that Quality is Job 1, this was clearly a response to damage to its
brand when customers realized that Ford products had declined in quality. Ford has
labored for decades to overcome this stigma. In contrast (until recently), Toyota has
steadily increased its customer loyalty and overcome the once prevailing view that
products made in Japan were of inferior quality. It has accomplished this by a culture
that emphasizes perfection in the customer experience from the product to the sales
process and the service process as well (Liker and Hoseus, 2008). This reputation has

27

been severely tarnished by the so-called sudden acceleration problem experienced by

several makes of Toyota automobiles during the past few years.
The two factors of cultural strength (strong and weak) and cultural functionality
(functional and dysfunctional) can be combined into a two by two culture management
typology matrix, identifying four different combinations as shown in Table I. This tool
can be used to identify the type of culture present in a company.
We have classified Starbucks, Wal-Mart, and Google as strong-functional culture
companies. This does not mean that they are perfect companies. We have classified AIG

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and GM (prior to its rebirth in 2010) as strong-dysfunctional culture companies. It
remains to be seen what the current culture at GM is. We have classified Toyota prior to
2008 as a weak-functional company. On the surface it would have seemed that Toyota
was a strong-functional culture company, but its failure to live up to its own cultural
standards (expressed in the so-called Toyota Way) suggests that the culture was not
really as strong as it seemed. Specifically, it appears that the sudden acceleration
problems was known inside the company bust was not revealed to customers. This led
to the unprecedented public apology by Akio Toyoda, amember of the founding Toyoda
family (Vartabedian andHamberger, 2009). Specifically, Toyoda said that the company
had reached a moment of crisis in which they had not adhered to the principles of The
Toyota Way. In effect, Toyota had lost a critical strategic asset: its culture of perfection
in products and services.
10.2 The economic costs of the loss of cultural as a strategic asset at Toyota
The failure of people at Toyota to adhere to the Toyota Way was not merely an
ethereal breach of a set of abstract principles. It has serious practical and financial
consequences. For decades Toyotas strategic mission had been to become the no. 1
automobile manufacturer in the world. It achieved that objective but it was a spurious
and hollow victory.
As a result of the sudden acceleration problem, which was a symptom and
consequence of its failure to adhere to its own cultural values and norms, Toyota
suffered a decline in market share, in brand loyalty, and in enterprise value
(as measured in an approximately 50 percent decline in its stock price). Toyota is also
vulnerable to customer law suits for damages form its products. Clearly, this is a very
significant economic cost attributable to the loss of an intangible but real strategic
asset. In addition, Toyotas stumble has permitted US automobile makers to have
another chance to reestablish their own brand equity. Bottom line: the Toyota
experience again shows that corporate culture is a strategic asset or liability of great
real world economic consequence, and not just a theoretical abstraction. Even though
currently the value of corporate culture is not measured and reported in financial
statements, it has significant practical importance.
The culture typologymatrix shown inTable I can be used bymanagers to assesswhere
their company and their strategic business units or subsidiaries would fit in the four
quadrants. The ideal place (quadrant) would be strong-functional. Any other quadrant
suggests the need for action to better manage and improve the companys culture.
10.3 Cultural assets and liabilities summary
As seen above, corporate culture can either be an asset or a liability (in the sense of a
strategic weakness or handicap). It is a major asset and source of sustainable
competitive advantage if it is a strong and functional culture. It is somewhat
Culture factors Functional Dysfunctional
Strong Starbucks AIG
Wal-Mart GM (pre-2010)
Google
Weak Toyota (pre-2008) Toyota (2008-)
Table I.
Cultural typology matrix

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of an asset if it is a weak-functional culture. It is a major liability and source of ongoing
competitive disadvantage if it is a strong and dysfunctional culture. It is somewhat
of a liability if it is a weak and dysfunctional culture. This set of possibilities is
summarized in Table II.
11. Critical role of performance measurement of culture
As is well recognized in accounting and management generally, measurement is
critical to effective management (Kaplan and Norton, 1992; Meyer, 2002; Flamholtz,
2003). However, this is especially true with intangible assets and intellectual property
such as corporate culture (Dumay and Cuganesan, 2011).
The challenge with including culture in performance measures is, as always, to
develop appropriate performance measurements of culture. The measurement of
culture can be performed using behavioral measurement tools previously developed
(Flamholtz, 2001; Flamholtz and Randle, 2011).
11.1 Measuring corporate culture
One precept of management states that if you cannot measure something you cannot
manage it. Through our research and experience we have developed methods of
measuring corporate culture, which are described below.
Culture can be measured using surveys with Likert type scales. This is shown in
Figure 1.
Culture factors Functional (assets) Dysfunctional (liabilities)
Strong Sustainable strategic asset Major strategic weakness
Weak Strategic asset Strategic weakness
Table II.
Cultural typology matrix
Figure 1.
Sample culture survey
We keep our commitments to our
customers/business partners.
Our people are the Companys
most valuable asset.
Our company reacts quickly to
changes in the marke tplace.
Our leaders act and communicate
with integrity.
People are rewarded based on their
performance.
Good planning is rewarded.
Company policies are applied
consistently.
Changes that affect employees are
communicated quickly and
effectively.
Current Culture Desired Culture
Current Statement
1.
2.
3.
4.
5.
6.
7.
8.
To A
Very
Slight
Extent
To A
Slight
Extent
To Some
Extent
To A
Great
Extent
To A
Very
Great
Extent
To A
Very
Slight
Extent
To A
Slight
Extent

29

To Some
Extent
To A
Great
Extent
To A
Very
Great
Extent

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Using this method of measurement, we can present a series of culture statements to
potential respondents and collect their assessment of the degree to which they agree
with the proposed or desired culture and also the extent to which see those things are
actually practiced in an organization (Figure 1). For example, Figure 1 includes the
statement: We keep our commitments to our customers/business partners. This is a
culture statement that would be related to the customer orientation dimension of
culture. There are two aspects of the survey:
(1) the extent to which people agree with the proposed value; and
(2) the extent to which they see it practiced in the firm.
The output of this measurement method is a set of measurement as of corporate
culture. It also enables the measurement of gaps between the desired strategic culture
and the actual or real culture (Flamholtz and Randle, 2011).
These measurement methods are also relevant to the disclosure gap with respect
to human capital accounting literature identified by Samudhram et al. (2010).
11.2 Measuring the effectiveness of a stated culture
The culture survey can be used to measure the effectiveness of the culture in two
ways:
(1) the extent to which the stated culture is embraced by people; and
(2) the extent to which actual behavior in the organization is consistent with the
stated culture.
By asking respondents about the extent to which they agree with a value and believe
it ought to be part of the ideal or desired culture, we have a method for measuring the
extent to which the stated culture is embraced by people. By asking respondents about
the extent to which they see it actually practiced in the current or existing culture,
we have a way to measure the extent to which the behavior in the organization is
consistent with the stated culture.
11.3 Measuring culture gaps
This measurement tool also provides a way to measure culture gaps, the difference
between the proposed (desired) and actual cultures. The culture gap is a measure of the
extent to which the company has been successful in helping people embrace and
practice its stated culture.
11.4 Performance measurement of culture and the balanced scorecard
Drawing upon these behavioral measurement methods, Flamholtz (2003) has previously
proposed to include corporate culture in performance measurement in a revised version
of the balanced scorecard. This, in turn, will help correct some of the limitations of the
balanced scorecard, as identified by Meyer (2002) and Flamholtz (2003).
The fundamental aimunderlying the so-called balance scorecard proposed byKaplan
andNorton (1992, 1996), is sound. It attempts to provide amore comprehensive perspective
for performance measurement than simply financial results. However, one major
limitation of the so-called balance scorecard is that its four proposed perspectives have
not been subjected to empirical test of validity of any kind (Flamholtz, 2003).Without such
empirical support, there are merely in effect, hypothesized perspectives. Meyer (2002)

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also argues for the need to validate proposed performancemeasures.Another limitation of
the Kaplan-Norton version of the balanced scorecard is that it does not include corporate

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culture.
Flamholtz (1995, 2003) has proposed an alternative model for a balanced scorecard.
The model proposed by Flamholtz (1995) has been subject to extensive
empirical testing, and all empirical tests have supported its validity (Flamholtz and
Aksehirli, 2000; Flamholtz, 2001, 2002-2003; Flamholtz and Hua, 2002a, b, 2003;
Flamholtz and Kurland, 2005). The model proposed by Flamholtz (1995, 2003) includes
corporate culture explicitly as a variable relevant to the assessment of balanced
performance.
Accordingly, Flamholtz (2003) has proposed that the Kaplan-Norton version of the
balance scorecard be replaced by a version using his model, which has been subject to
considerable empirical testing and support, and also explicitly include corporate
culture as a dimension of performance.
As Meyer (2002) points out, one major problem with the balanced scorecard version
proposed by Kaplan and Norton (1992, 1996) is that it is now used for purposes for
which it was not originally intended. As he states:
Although the scorecard was conceived as a means of communicating the firms strategy rather
than a template for performance measurement, today the scorecards dominates discussions of
performance measurement, and compensation is routinely based on scorecard measures.

12. Concluding comments

Corporate culture we cannot see it, touch it, smell it, taste it or hear it, but it is there. It
pervades all aspects of organizational life and it has a profound impact upon
organizational success and failure. If it is managed well, it can be a real economic and
strategic asset. If it is managed incorrectly or allowed to deteriorate it can become a
true liability or strategic disadvantage. Both of these states of culture development
can be measured in financial performance and are reflected in differential shareholder
value, as we saw with Wal-Mart and K-Mart.
Currently corporate culture is not measured or reported in financial statements,
either in internal statements or external financial reports to shareholders, potential
investors, bankers, or others. However, it is possible to measure corporate culture as a
strategic asset. Reporting it as an asset in financial statements for external purposes
would require a significant change in accounting methods; but it could be measured
and reported for internal purposes (Flamholtz, 2005). It will, however, require new
ways of thinking about the role of measurement and perhaps the entire accounting
paradigm (Roslender, 2009).
The development, evolution and management of corporate culture are elusive but
critical processes in organizations at all stages of growth. Culture is not static, and it is
sometimes an extraordinarily valuable intangible asset, while at others it is a true
liability. It can also transform from an asset into a liability, as we have seen with
Toyota.
This article has attempted to address the theoretical, practical, and measurement
issues to explain the role of corporate culture in business models, as a strategic asset,
and how it impacts the so-called bottom line of financial performance. The
management of corporate culture is complex; but the processes that create and sustain
this invisible construct can make it potentially the ultimate strategic asset. As we have

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seen in the case of Starbucks Coffee, which today totally dominates the retail coffee
cafe business throughout the world, culture can be the critical component of a
successful business model.
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Corresponding author
Eric G. Flamholtz can be contacted at: ef@mgtsystems.com

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